NBFC liquidity under stress, govt plans early capital infusion

Sources familiar with the discussions said the Department of Financial Services (DFS) is working closely with top officials in the Finance Ministry to prepare the plan, which is likely to be presented at the level of the PMO.

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Currently, banks are not lending and maintaining high SLR (statutory liquidity ratio) despite the RBI lowering such requirement.

The Centre is readying a package of measures, including possible advancement of the capital infusion schedule of public sector banks and involving state-owned SIDBI to infuse liquidity, in order to ease the growing stress in financial markets on account of the constrained liquidity position of Non Banking Financial Companies (NBFCs).

Sources familiar with the discussions said the Department of Financial Services (DFS) is working closely with top officials in the Finance Ministry to prepare the plan, which is likely to be presented at the level of the Prime Minister’s Office.

The proposed intervention comes amid worry in financial markets about the nearly Rs 1 lakh crore worth of debt papers of NBFCs coming up for redemption by March, while debt raising has progressively become more difficult through commercial paper and corporate debt market.

Officials in the DFS have been working out the details of these proposals over the past couple of days and an announcement is expected shortly, two government sources confirmed.

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With the NBFCs’ redemption looming large, the government is working to ensure that liquidity conditions remain orderly in the markets. While the Finance Ministry had pegged its hopes on the Reserve Bank of India (RBI) easing some of the Prompt Correct Action (PCA) norms, which imposes certain operational and lending restrictions on weak banks in order to improve their health, the central bank’s reluctance in this regard has prompted the government to work on alternative measures, sources said.

A senior finance ministry official said that “economic policy has to be flexible, it cannot be like municipality bylaws”, referring to the RBI’s stance of being inflexible with regard to the PCA framework. A total of 11 out of the 21 public sector banks are currently under the PCA framework.

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According to a source, the PMO may intervene and ask the RBI to relax the PCA norms so that the 11 banks are allowed to lend to NBFCs. Currently, banks are not lending and maintaining high SLR (statutory liquidity ratio) despite the RBI lowering such requirement.

While SIDBI officials were also part of the recent discussions, a source said that “there may be a possibility of the government asking SIDBI to provide back stop guarantee to a pool of funds raised by NBFCs”. Advancing the Rs 45,000 crore of equity infusion in public sector banks is another option that is being considered as it may improve the health of the banks and pull them out of PCA.

The RBI’s contention has been that the PCA measures were aimed at resurrecting the weak banks in the medium term, and they would not affect the availability of credit in the economy. Bank credit growth rose to its highest in more than four years as the liquidity crunch in the money market prompted borrowers to seek bank funding. According to the latest RBI data, bank credit rose 14.30 per cent as of October 12, 2018, to Rs 92,60,572 crore as against Rs 81,01,532 crore in the same period last year. Credit growth stood at 12.51 per cent in the previous fortnight.

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Even as bank credit has been on the uptick, the continuing defaults by Infrastructure Leasing & Financial Services (IL&FS) group on its debt obligations have jolted the debt raising plans of many NBFCs, creating distrust in the wholesale debt market. While top-rated companies are able to raise debt, funding taps for lower-rated NBFCs have either turned dry or the interest costs have gone up sharply.

To ease liquidity shortage, RBI recently eased banks exposure norms for NBFCs and pumped in liquidity through its open market operations (OMOs), while the State Bank of India offered to provide some relief with its proposal to buy their good quality NBFC assets worth Rs 45,000 crore. But these measures have not provided enough support to NBFCs.

Finance Ministry officials did not respond to queries seeking comment on the proposed plan.